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Air Force Depot Maintenance: Improved Pricing and Cost Reduction Practices Needed

GAO-04-498 Published: Jun 17, 2004. Publicly Released: Jun 17, 2004.
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Highlights

The Air Force depot maintenance activity group in-house operations generate about $5 billion in annual revenue principally by repairing aircraft, missiles, engines, and other assets. In doing so, the group operates under the working capital fund concept, where customers are to be charged the anticipated costs of providing goods and services to them. The group's average price for in-house work almost doubled between fiscal years 2000 and 2004 from $119.99 per hour to $237.84 per hour. GAO was asked to determine (1) what factors were primarily responsible for the price increase, (2) if the prices charged recovered the reported actual costs of performing the work, and (3) if the Air Force has taken effective steps to improve efficiency and control the activity group's costs.

Recommendations

Matter for Congressional Consideration

Matter Status Comments
The congressional defense committees have shown interest in the amount of cash in the Defense Working Capital Fund in past years. The Air Force Working Capital Fund cash balance has exceeded the maximum cash requirement by over $1.3 billion for each of the first four months of fiscal year 2004. If DOD does not take action to reduce the cash balance to the 7 to 10 day requirement, the Congress may wish to take action to reduce the amount of excess cash in the Air Force Working Capital Fund.
Closed – Implemented
In response to GAO's recommendation, Congress reduced the Air Force fiscal year 2005 Operations and Maintenance appropriations by $1,133,200,000 due to excessive cash amounts in the Air Force Working Capital Fund.

Recommendations for Executive Action

Agency Affected Recommendation Status
Department of Defense To improve the business operations of the Air Force Working Capital Fund including cash management and the setting of prices and efforts to control costs of the depot maintenance activity group, the Secretary of Defense should take action to reduce the amount of excess cash in the Air Force Working Capital Fund.
Closed – Implemented
In our draft report dated April 14, 2004, we recommended that the Secretary of Defense take action to reduce the amount of excess cash in the Air Force Working Capital Fund. In responding to this recommendation, Defense took action to eliminate excess cash balances in the Air Force Working Capital Fund. Specifically, on April 28, 2004, Defense transferred $1.1 billion of excess cash from the Air Force Working Capital Fund to the Operation and Maintenance appropriations of the Army ($979 million) and the Navy ($121 million) to meet operational needs. According to a DOD budget official, the transfer reduced DOD's need to request an additional similar amount of funds since the funds were already provided by means of the transfer and used to pay Army and Marine Corps bills.
Department of Defense To improve the business operations of the Air Force Working Capital Fund including cash management and the setting of prices and efforts to control costs of the depot maintenance activity group, the Secretary of Defense should direct the Secretary of the Air Force to develop prices that cover the total costs of providing goods and services to customers and not constrain prices as has been done in the past.
Closed – Implemented
In June 2004, GAO reported that the prices that the Air Force depot maintenance activity group charged customers were not set high enough to recover the group's reported costs of performing the work for fiscal years 2000 through 2003. Air Force officials told GAO that the prices were constrained to help ensure that the activity group's customers would be able to get needed work done with the amount of funds provided them through the budgeting process. In part, because the sales prices were constrained, the activity group reported losing about $1.1 billion in the four-year period. GAO recommended that the Secretary of Defense direct the Secretary of the Air Force to develop prices that cover the total cost of providing goods and services to customers and not constrain prices as has been done in the past. DOD concurred with our recommendation and stated that the OSD (Comptroller) would perform a more intensive review of the Air Force depot maintenance billing rates to ensure that the proposed pricing structure is adequate to cover the total cost of operations. Thus, the activity group reported a $307 million accumulated gain in fiscal year 2004 and expects to show a $310 million accumulated gain in fiscal year 2005. Further, at the end of fiscal year 2006, the activity group expects to report a zero accumulated operating result--complying with DOD policy on operating on a break-even basis. By setting the prices to cover the full cost of operations, the activity group can operate on a break-even basis as intended--that is, not make a profit or incur a loss.
Department of the Air Force To improve the business operations of the Air Force Working Capital Fund including cash management and the setting of prices and efforts to control costs of the depot maintenance activity group, the Secretary of the Air Force should direct the Commander, Air Force Materiel Command to develop and complete a viable, systematic methodology for analyzing material cost variances that encompasses both the price paid for material and material usage that would enable the Air Force Materiel Command to better understand the underlying causes of the rapidly increasing material costs and take actions to control material costs, as appropriate.
Closed – Implemented
The Air Force implemented a new cost accounting system titled "Depot Maintenance and Production System" that should greatly improve its cost visibility. The system allows the Air Force depots to track costs to specific workloads and improve accuracy of forecasting material increases due to consumption and also improve visibility of material price increases by commodity. In June 2006, a DOD Inspector General official reported that the Air Force had verified to the Office of the Undersecretary of Defense (Comptroller)'s satisfaction that the new cost accounting system provides quality data with orders validated against bills of material and job order numbers to compare actual costs to standards as well as validating quantities and frequencies to better control material costs.
Department of the Air Force To improve the business operations of the Air Force Working Capital Fund including cash management and the setting of prices and efforts to control costs of the depot maintenance activity group, the Secretary of the Air Force should direct the Commander, Air Force Materiel Command to hold the air logistics centers' managers accountable for compliance with the Command's mandatory Instruction 21-137 requiring the centers to enter all initiatives and related data into the data repository completely and accurately. This should include initiative information on costs, return on investment, and quantifiable results for all process improvement initiatives. At a minimum, the Command needs to issue a memorandum to the air logistics centers reiterating their responsibilities for compliance with the instruction.
Closed – Implemented
In response to GAO's recommendation, the Command issued a memorandum to the air logistic centers on January 31, 2005, reiterating the requirements contained in the instruction for recording complete and accurate data into the data repository.
Department of the Air Force To improve the business operations of the Air Force Working Capital Fund including cash management and the setting of prices and efforts to control costs of the depot maintenance activity group, the Secretary of the Air Force should direct the Commander, Air Force Materiel Command to periodically review the data contained in the data repository to (1) determine whether the data provided by the air logistics centers is complete and useful and (2) identify ways to consolidate initiatives and share lessons learned from the initiatives with the three centers.
Closed – Implemented
DOD concurred with our recommendation and stated that the Air Force would establish a schedule to periodically review the data repository and periodically brief DOD on the status of this initiative. On December 11, 2006, AFMC announced the development and implementation of a new web-based cost/benefit analysis and report planning tool to share standardized process improvement data with the three centers. AFMC has real-time access to all the information in the financial data repository and reviews it at least twice annually for accuracy and usefulness.
Department of the Air Force To improve the business operations of the Air Force Working Capital Fund including cash management and the setting of prices and efforts to control costs of the depot maintenance activity group, the Secretary of the Air Force should direct the Commander, Air Force Materiel Command to summarize and determine the actual savings and/or real benefits as compared to the costs from the improvement initiatives already contained in the repository.
Closed – Implemented
In order to track the costs and benefits associated with process improvement initiatives at the depots in compliance with our recommendation, AFMC announced the development and implementation of a new web-based cost/benefit analysis and report planning tool to share standardized process improvement data with the three centers on December 11, 2006. The new tool tracks both tangible and intangible benefits of the process improvement initiatives, along with the process improvement initiatives' costs. The process improvement initiatives' costs and benefits are required to be updated in the database annually for 15 years or until the transformed process is no longer required.

Full Report

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Topics

Air Force facilitiesAir Force procurementAir Force suppliesAircraft maintenanceCost analysisEquipment maintenanceLabor costsMaintenance costsMilitary cost controlOverhead costsPrices and pricingProductivity in governmentPrice increases